The Manufacturing of an Energy Drink Called BLASS - Essay Example

Potential Investors – Potential Entrepreneur Introduction Healthy Drinks & More is the of a small sole trader business. The aim of the business is to engage in the manufacturing of an energy drink called BLASS. BLASS Energy Drink is the healthy alternative to Red Bull, Energy Fizz and all the other energy drink in its class. The drink is made from vitamins, minerals, ginseng for energy, bee pollen and a whole host of healthy ingredients. It has only 10g of sugar compared to others with upwards of 25g. The drink is aimed at teenagers and sports enthusiasts from ages 13 upwards. Packaging The product is to be packaged in attractively designed, silver and red tin cans with the name written in green and running diagonally from the bottom to the top. This form of packaging was chosen because of the sterilisation process which it has to undergo. One writer states “In canning sterilization processes, the product is sealed in a metal container and then treated thermally in order to destroy all pathogenic and spoilage microorganisms. This sequence of operations does not allow recontamination of the product after thermal treatment, and, as a result, it remains shelf-stable for a long period of time.” Healthy Drinks & More is a small business and we have to ensure that our product is tamper proof. The other types of containers do not carry that assurance. The writer further states: “they can be sealed hermetically; they provide excellent protection from gases, moisture, microorganisms, rodents, and insects; they are stackable, tamper-proof, and relatively inexpensive; and, in general, they can be thermally processed.” BLASS Marginal Costing Statement The marginal costing statement shows the marginal cost of producing BLASS. That is, what it would cost to produce one extra can of “BLASS”. Unlike some other marginal costing statement the cost of direct material and direct labour are combined because we have outsourced the production of the drink and we were not able to receive a breakdown of the cost. The total cost of direct materials and labour is £1 per tin. The 250 ml cans are to be sourced by us at a cost of 20p per tin (inclusive of design), for a minimum order quantity of 100,000 cans. We chose to provide the cans so that we could exercise some level of control over how they are used, while ensuring that they do not get into the wrong hands. Fixed costs relate to administration salaries, depreciation of fixed assets and rental of office space to carry out administrative functions. Break Even Analysis The breakeven table (in Appendix 2) shows information on variable cost, which is described as direct costs of materials and labour/factory cost in the marginal costing statement. It has information on various costs and sales revenue at each level of sales. Additionally, the table shows the contribution (sales – total cost) to fixed cost at each level of sales. The table indicates that contribution is equal to fixed cost at 750,000 units. From the table you can see that fixed cost remains the same over our anticipated level of production. These are costs that will not change within the short term. The breakeven chart (in Appendix 3) shows the total cost line (colour yellow), the total revenue line (colour blue) and the fixed cost line (colour red). The break-even is the point where the total revenue line and the total cost line crosses. As we saw in the break even table, the business will break-even when 750,000 units are sold. We expect that this will happen somewhere in July 2011, which is the beginning of our third quarter of operations. We expect to surpass this level in the following year, with the hosting of the Olympic Games in London. The area above and to the right of the break-even point is described is the margin of safety. “The margin of safety is the amount by which actual output/sales may fall short of the budget without incurring a loss.” (BPP, 1991). The fact that our manufacturers, who are also our distributors is a major player in the market with several distribution channels augurs well for the success of the product. Where the Total Cost Line lies above the Total Sales Revenue Line this indicates a loss and where the Total Sales Revenue Line lies above the Total Cost line this indicates profit. Cash Budget The purpose of the cash budget (see Appendix 4) is to determine our levels of receipts and payments during the year and to determine if there are any deficiencies for which cash may have to be sourced externally. The level of sales for the first year is expected to be approximately 1.2mn cans of BLASS. The price of the product to consumers will be £2.50 and we will receive £2.00 from the sale of each can. We expect to receive payments from supplies two weeks after delivery and so at the end of the year only two weeks worth of sales revenue should be outstanding. Therefore, from a sale of: Sales in units 1,200,000 Selling price per unit £2.00 Sales Revenue £2,400,000 Two weeks sales 50,000 units @ £2.00 = £100,000 That is, we expect to receive £2,400,000 – £100,000 = £2,300,000. From our total receipts for the year of £2,400,000 which includes £100,000 from potential investors (the reason for making this presentation). We expect to buy fixed assets to a value of £60,000 for our rented office in London. Rent for the office is £5,000 per month (inclusive of utilities), pay salaries for the Manager (yours truly), the Quality Controller who will be based at our Manufacturer’s Plant and two other support staff up to a total of £120,000. Additionally, we will be paying for £420,000 of advertising and promotion to give our product the real start that it requires. Based on what we expect to be a fairly good performance we expect to pay dividends to our investors of 10%, that is, £10,000. This we expect to pay before the year ends on November 30, 2011. This will leave us with a cash balance of approximately £360,000. Forecast Income Statement Modest sales revenue of £2.4mn is expected in our first year in business. (See Appendix 5.) Our direct cost which relates to manufacturing and distribution (which is outsourced) is expected to be £1.44mn. Of this amount, £240,000 relates to packaging (250ml tin cans). As explained earlier we will be responsible for sourcing the cans. Our forecast profit is expected to be approximately $365,000. From the figures in the Forecast Income Statement we can calculate the following ratios which indicates what our financial performance is expected to be. Gross profit margin = = Net Profit Margin = = The calculations above indicate that the gross profit as a percentage of sales is 41% and net profit as a percentage of sales 15%. This is not bad for a start, especially since I am being paid a salary which needs to be added back in the calculation. We have also projected that Dividends of 10,000 will be paid to our investors. This is a return of 10%. Forecast Balance Sheet The Forecast Balance Sheet of Healthy Foods & More (as seen in Appendix 6) is projected to have assets with a net book value of 51,000 at the end of the year. Its current assets: current liabilities ratio is: 484,000/60,000 = 8:1 which along with the working capital information in the Forecast Balance Sheet indicates that the business will be able to pay its debts as they fall due. Most of the current assets are cash. The level of inventory shows that we are not overtrading. We are trying at best to keep it at a modest level. However, projections show that we should have the cash to increase inventory levels somewhat as we see fit. The value of the business at the end of the year (November 2011) as shown by its net assets will be approximately £$475,000. There are no long term liabilities so there will be room for loans if we consider it necessary in the future. Distribution BLASS will be distributed by our manufacturers and is to be sold in major supermarket chains – Sainsbury and Tesco in the UK. Our manufacturers already have a presence in the market as they produce Sodas and alcoholic beverages and so they are established with their own distribution channels. In the future we will be looking at other markets in Europe and North America. Advertising and Promotion The product will be advertised on major sports and frequently listened to cable channels. It will be advertised in sports magazines and we are expecting to use Usain Bolt “the fastest man on earth” in one of our adverts, especially the ones closest to the 2012 Olympic Games. Conclusion We are looking for people to invest in this venture. We consider it a worthwhile and profitable venture. We are therefore looking for partnerships which will enable “BLASS” to become the Number One healthy alternative to the current energy drinks on the market. We at Healthy Drinks & More look forward to have investors on board who want to be identified with success. We invite you to consider “BLASS” as your next best investment and encourage you to develop an interest in “BLASS” – “the healthiest drink of the future”. Appendix 1 Healthy Drinks & More –“BLASS” Marginal Cost Statement Year ending November 30, 2010 £ £ Direct Materials and Labour @ £1.00 1,200,000 Direct Materials -tins @ £0.2 240,000 Prime Cost 1,440,000 Less closing inventoy 20,000 units 24,000 Total Cost/Factory Cost of goods sold 1,416,000 Sales 2,400,000 Contribution (Sales - Variable Cost) 984,000 Less Fixed Cost Depreciation 9,000 Advertising & Promotion 420,000 Salaries 120,000 Rent 60,000 609,000 Profit 375,000 Additional information: 1. Direct Materials and labour includes distribution costs 2. Factory cost is equal to total variable cost 3. Advertising is fixed. Payment terms are as per the cash budget. The difference for the first three 4. months reflect the higher introductory advertising required and includes the distribution of samples. 5. BLASS will contain some of the highest quality ingredients and therefore the direct cost is above that of other energy drinks like Red Bull Appendix 2 BLASS Energy Drink Break-even Table Fixed Cost 600,000 Units Sold Revenue Variable Cost Contribution Fixed Cost Total Revenue Profit/(Loss) £ £ £ £ £ £ Variable Cost 1.2 0.00 0.00 0.00 0.00 600,000.00 600,000.00 (600,000.00) Unit Revenue 2 1.00 2.00 1.20 0.80 600,000.00 600,001.20 (599,999.20) 100,000.00 200,000.00 120,000.00 80,000.00 600,000.00 720,000.00 (520,000.00) 250,000.00 500,000.00 300,000.00 200,000.00 600,000.00 900,000.00 (400,000.00) 500,000.00 1,000,000.00 600,000.00 400,000.00 600,000.00 1,200,000.00 (200,000.00) 750,000.00 1,500,000.00 900,000.00 600,000.00 600,000.00 1,500,000.00 0.00 1,000,000.00 2,000,000.00 1,200,000.00 800,000.00 600,000.00 1,800,000.00 200,000.00 1,250,000.00 2,500,000.00 1,500,000.00 1,000,000.00 600,000.00 2,100,000.00 400,000.00 1,500,000.00 3,000,000.00 1,800,000.00 1,200,000.00 600,000.00 2,400,000.00 600,000.00 2,000,000.00 4,000,000.00 2,400,000.00 1,600,000.00 600,000.00 3,000,000.00 1,000,000.00 Break-even point occurs where Contribution (Revenue - Fixed Cost) is equal to fixed cost. It indicates how many units needs to be sold iin order that the business does not lose money. From the table we see that the business will not lose any money if it produces . 750,000 units of Blass. Appendix 3 From the chart one can see the break-even point at 750,000 units. At this point sales revenue is equal to £1.5mn. At this point the total cost is equal to total revenue. If less is produced then fixed cost would not be recovered. It is also at this point that contribution is equal to fixed cost. Contribution to fixed cost is calculated as Total sales revenue less total variable cost. When Total revenue = total variable cost, contribution = 0. Total cost = Total variable cost + fixed cost. Fixed cost = £600,000. This cost will still exist in the short term, whether or not we continue producing. Appendix 4 Healthy Drinks & More – “BLASS” Cash Budget Year to November 30, 2011 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Total Inflows £ £ £ £ £ £ £ £ £ £ £ £ £ Receipt from Sales 100,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 2,300,000 Receipts from investors 100,000 0 0 0 0 0 0 0 0 0 0 0 100,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 2,400,000 Outflows Trade creditors 60,000 120,000 120000 120000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 1,380,000 Advertising & Promotion 50,000 50,000 50,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 420,000 Labour 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 120,000 Rent 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 60,000 Capital Expenditure 50,000 0 0 0 0 0 0 0 0 0 0 0 50,000 Dividends 10000 10,000 Total Outflow 175,000 185,000 185,000 165,000 165,000 165,000 165,000 165,000 165,000 165,000 165,000 175,000 2,040,000 Net Inflow/(Outflow) 25,000 15,000 15,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 25,000 360,000 Cash b/f 0 25,000 40,000 55,000 90,000 125,000 160,000 195,000 230,000 265,000 300,000 335,000 360,000 Cash c/f 25,000 40,000 55,000 90,000 125,000 160,000 195,000 230,000 265,000 300,000 335,000 360,000   Assumptions: 1. Production will start by the second week in December. Distributors are given 14 days credit and so only two weeks sales will be received in December. 2. A large advertising outlay is important in order to get customers to taste and therefore encourage them to buy the product. 3. Sales for the period is expected to be steady throughout the months. It will take sometime for the product to get around into all the supermarkets in the UK. 4. It is expected that sales will pick up during the Olympic Games in London in the summer of 2012 5. The number of production runs during December will be the same as in the following months. 6. Creditors relate to the third party engaged in the manufacture and distribution of the product. Appendix 5 Healthy Drinks & More – “BLASS” Forecast Income Statement Year ending November 30, 2010 £ £ Sales 2,400,000 Cost of sales Opening inventory 0 Purchases 1,440,000 Closing inventory (24,000) 1,416,000 Gross Profit 984,000 Less Expenses Rent 60,000 Salaries 120,000 Advertising & Promotion 420,000 Depreciation 9,000 Dividends 10,000 619,000 Net Profit 365,000 Asumptions: 1. Twenty five (25) production days in every month and five (5) days of inventory is left on hand at the end of every month. 2. $100,000 is owing from debtors at the end of every month. 3. The manufacturing process is done by a third party who has the requisite knowledge in the production of energy drinks. 4. Two weeks of purchases are owed to Trade creditors for production and distribution of BLASS 5. Salaries relate to quality control personnel stationed at the manufacturing company, the Manager and two other staff 6. The investors will receive a dividend of at least 10% of their investment at the end of every year. They are paid by the end of the year. Appendix 6 Healthy Drinks & More – “BLASS” Forecast Balance Sheet Year ending November 30, 2011 Fixed Assets Cost (£) Accum. Dep. (£) NBV (£) Motor Vehicle 30000 6000 24000 Office Furniture 30000 3000 27000 60000 9000 51000 Current Assets Inventory 24000 Trade Debtors 100000 Bank 360000 484000 Current Liabilities Trade Creditors (60000) Working Capital 424000 Net Assets 475000 Financed by: Capital: Owner 10000 Investors 100000 110000 Profit 365000 475000 Additional information: 1. The owner invested 10,000 by way of office furniture in the business. 2. Depreciation of Office Furniture is at 10% per annum and Motor vehicle 20%. Read More